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Maximizing the Section 199A Deduction for Eligible Virtual Currency Activities & Businesses 

Author: John Cunningham, McLane Middleton, P.A.



Internal Revenue Code section 199A provides qualified taxpayers who are owners of domestic  pass-through businesses with annual federal income tax deductions of up to 20% of the  “qualified business income” of their businesses simply for owning them. Qualified taxpayers  include owners of virtual currency exchanges and of businesses engaged in virtual currency  mining, staking, delegating and consulting. 

However, as explained in the numbered paragraphs below, the owners of many pass-through  businesses must undertake potentially major restructuring of their federal tax arrangements and  their other arrangements, including even personal arrangements, in order to maximize their  entitlement to section 199A deductions.  


1) Types of qualified taxpayers. Qualified taxpayers include individuals and certain types of  trusts, even if they are purely passive owners of domestic pass-through businesses. And  these taxpayers may be either U.S. citizens or non-U.S. citizens who are subject to U.S.  federal income tax. 

2) Domestic businesses. Domestic businesses mean, in general, businesses that derive some or  all of their income from work they do in the U.S. or from U.S. customers. 

3) Pass-through businesses. Pass-through businesses mean individuals and entities that are  taxable as sole proprietorships, S corporations or partnerships. Most multi-member LLCs are  taxable as partnerships.  

4) Qualified business income. The qualified business income of a pass-through business means  its net business income less certain reductions, including reductions of deductible portions of  Self-Employment Taxes, and deductions for health insurance benefits and retirement  benefits. 


1) Taxable income and threshold amounts. Assuming that you are a qualified taxpayer, the  amount of the section 199A deduction to which you are entitled will depend principally on  your taxable income and your section 199A “threshold amount.” The section 199A  threshold amounts for 2020 are: 

  1. a) For married individuals filing jointly, $326,600; and 
  2. b) For all other individuals filing returns, $163,300.  

2) Limits on section 199A deductions. For many owners of virtual currency businesses, section  199A deductions can be substantial—in some cases, thousands or tens of thousands of  dollars. However, section 199A limits total deductions under the section (including  deductions for dividends from Real Estate Investment Trusts and allocations by certain types  of publicly traded partnerships) to 20% of their taxable income less net capital gains and  certain types of corporate dividends. 

3) SSTBs and non-SSTBs. Your section 199A deduction will also depend on whether your  business is a “specified service trade or business” (an “SSTB”) or a non-SSTB. SSTBs  include all traditional professions, including consultants (including financial consultants), but  excluding architects and engineers. Non-SSTBs include all non-professional businesses.  The IRS will probably view virtual currency software engineers as engineers for section  199A purposes.  

4) Employees. Employees of virtual currency businesses cannot qualify for section 199A  deductions. However, these employees can receive them if they convert to the status of  independent contractors of these businesses. 

5) Consultants. The IRS will undoubtedly view as “consultants” under section 199A virtual  currency businesses and individuals that receive fees for providing their customers with  advice about virtual currency issues.  

6) Qualified taxpayers whose taxable income does not exceed their threshold amounts. If your  taxable income does not exceed your threshold amount, then, whether your business is an  SSTB or a non-SSTB, your section 199A deduction will be the maximum deduction available under that section—namely, your share of 20% of the qualified business income of  your business.  

7) Qualified taxpayers within their phase-in ranges. For most businesses whose owners are  within their section 199A phase-in range, their deduction under the section will be the lesser  of: 

  1. a) 20% of their qualified business income; and 
  2. b) 50% of the aggregate W-2 wages paid by their businesses to its employees, including  W-2 wages paid to S corporation shareholder-employees.. 

The section 199A phase-in range for qualified taxpayers filing jointly is $100,000. For all  others, it is $50,000 

However, the income of sole proprietors and of partners of entities taxable as partnerships are  not W-2 wages for section 199A purposes, and the section 199A deductions available to owners of SSTBs within their phase-in range will generally be less than deductions for owners of non-SSTBs. 

8) Qualified taxpayers whose taxable income exceeds their phase-in range. Qualified taxpayers  whose taxable income exceeds their phase-in range and whose businesses are non-SSTBs  will also generally qualify for the section 199A deduction under the rule summarized  immediately above. However, for owners of SSTBs whose taxable income exceeds their  phase-in range, no section 199A deduction will be available. 

9) Types of businesses that must restructure. The following are the main types of virtual  currency businesses that must be restructured in order for qualified taxpayers who own them  to receive section 199A deductions: 

  1. a) C corporation shareholders. The owners of all virtual currency businesses that are  taxable as C corporations must convert their businesses to a type of business that is  taxable as a pass-through business (including LLCs) in order to receive section 199A  deductions. 
  2. b) Certain S corporation shareholders. Most virtual currency businesses whose taxable  income does not exceed their threshold amount but that are taxable as S corporations  must convert their federal tax regimens to that of sole proprietorships or partnerships in order to receive section 199A deductions. The default federal tax regimen of most  multi-member LLCs is that of partnerships. 
  3. c) Sole proprietor and partners. Certain sole proprietors and partners of entities taxable  as partnerships whose taxable income exceeds their threshold amounts must convert  their federal tax regimen to that of S corporations in order to receive section 199A  deductions.  

10) The need for business entity restructuring. Furthermore, section 199A restructuring often  requires not only tax restructuring but also business entity restructuring. For example, if  your business entity is a state-law business corporation (an “Inc.”), you may have to  convert it to an LLC for section 199A restructuring purposes. A number of other considerations may be useful to owners of virtual currency businesses with respect to  section 199A restructuring. These include: 

  1. a) The potential to obtain or increase section 199A deductions by dividing entities that provide  both SSTB and non-SSTB products and services into an SSTB entity and a non-SSTB entity. 
  2. b) Potential aggregation of two or more separate lines of business to obtain or increase section  199A deductions. 
  3. c) Changing or delaying filing status of individuals, or altering the amount or timing of income  recognition, to better manage the income thresholds that regulate entitlement to the section  199A deductions. 
  4. d) Altering the amount or timing of income or deduction recognition to better manage the  income thresholds that regulate entitlement to the section 199A deductions. 


John Cunningham is a business and tax attorney licensed to practice in New Hampshire and Massachusetts. He is  of counsel to the New Hampshire-based law firm of McLane Middleton, P.A. His practice is focused on LLC law  and tax and on assisting clients to maximize their Internal Revenue Code section 199A pass-through deductions.  

John is the author of Drafting Limited Liability Company Operating Agreements, the leading U.S. LLC formbook  and practice manual, and of Maximizing Pass-Through Deductions under Internal Revenue Code Section 199A, the  only book on section 199A published by a recognized publisher. Both of John’s books are published by Wolters  Kluwer, a global provider of legal, tax and medical information. The web pages in the Wolters Kluwer website  concerning John’s books are, respectively, company-operating-agreements-fourth-edition/ and pass-through-deductions-under-internal-revenue-code-section-199a/

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